Australian Renewable Fuels, the owner of the Picton biodiesel plant near Bunbury, is negotiating with its biggest shareholder Wasabi Energy over a potential $12 million merger.

The companies are examining a straight one-for-one share swap and a scheme of arrangement, with Wasabi taking the lead role. However, Wasabi was yesterday trading at a discount to arfuels, finishing flat at 1.9¢, while arfuels shares lost 0.1¢ to 2.1¢.

A merger would end a tumultuous five years for arfuels as a listed company, during which its shares crashed spectacularly from a high of $1.48 in 2006, after the group was crippled by difficulties securing supply contracts with major oil companies.

Sentiment had also turned against the biodiesel sector amid rising feedstock prices and a Federal Government reversal over support for the "green" energy source.

Wasabi bought into arfuels in June 2008, helping to refinance the company after it was forced to put its Picton and Port Adelaide plants on care and maintenance, and has since increased its holding to 24.6 per cent.

Arfuels restarted production at the Picton plant in mid-2008 and announced a supply deal with Wesfarmers' Premier Coal operations in October last year.

Arfuels chief financial officer Bill Day said yesterday that directors were still assessing the proposal but an amalgamation could give shareholders a more diversified company.

Wasabi has investments in water conservation, uranium and geothermal companies.

"Operationally it won't really change arfuels, but for shareholders it would give them broader exposure to the green technology and energy sectors, which is the major advantage the directors see," Mr Day said.